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Working Paper 17/2017
Growth and Strategies of Large and Leading Firms - Top 50 firms on the
Johannesburg Stock Exchange (JSE)1
Teboho Bosiu, Nicholas Nhundu, Anthea Paelo, Mmamoletji Oniccah Thosago and
Thando Vilakazi
Centre for Competition, Regulation and Economic Development, University of
Johannesburg
[email protected]; [email protected]; [email protected]; [email protected];
Abstract
The orientation and investments of large and lead firms can shape the patterns of industrial
development and growth in a country. It is thus important to understand the investment
decisions of large firms and how they relate to policy in terms of building productive capacity
in the South African economy. This study assesses the investment decisions and strategies
of the largest 50 firms listed on the Johannesburg Stock Exchange (JSE) (by market
capitalisation) as they relate to industrial development in South Africa. The assessment is
based on an analysis of publically available annual reports and announcements for listed firms.
A key finding is that while there has apparently been considerable changes in the composition
of the top 50 the very large firms (in the top 20) have largely retained their positions ranked by
market capitalisation. The assessment also shows that while firms have shown significant
profitability, they have retained significant portions of profits within their organisations. The
majority of the retained profits are being held as reserves as opposed to being reinvested such
that total reserves held stood at R1.4 trillion by 2016. Investments that have been undertaken
largely comprise expenditure on replacement capital and mergers and acquisitions, rather
than expansionary expenditure. There is a high degree of internationalisation by South African
firms, with the majority of merger and acquisition deals being concluded outside South Africa.
JEL classification
D21, D22, E22, G34, L25, O12, O16, O25
1 This study was funded by the Department of Trade and Industry (DTI) under the Industrial Development Research Programme (IDRP).
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1. Introduction
South Africa’s low economic growth in recent years has contributed to continued high levels
of unemployment and inequality and the pattern of growth has largely not been inclusive. The
country’s economy is still heavily reliant on primary activities such as mining, and productive
sectors capable of absorbing relatively low skilled labour such as manufacturing have been
declining since the late 1980s. The decline in manufacturing suggests early
deindustrialisation, which will require a coherent industrial policy to reverse. Industrial policy
involves the structuring of policy, incentives and support mechanisms by the state to support
the development of domestic firms. Firms’ strategies (i.e., including on investment and
expansion, location decisions and pricing and market conduct) are central to the process of
industrial development. These strategies are driven by a range of factors including existing
market competition in a sector or country, product market competition, as well as cost and
demand linkages (Puga and Venables, 1996).
Large businesses in South Africa are now highly internationalised, including both outward
internationalisation by South African firms as well as the presence of transnational
corporations (TNCs) with their roots in other countries. Several companies are either cross-
listed, or have significant portions of their revenues derived abroad. Internationalisation of
South African firms could signal efforts to raise capital from international capital markets in
order to reinvest in home markets, or it could signal declining investment appetite in home
markets relative to international markets, with local firms seeking high-return investment
opportunities abroad. Inward internationalisation may be positive from the perspective of
drawing in foreign capital and productive capabilities, although it may also mean foreign TNCs
seeking to extract capital from South Africa in order to reinvest in their countries of origin, as
discussed further below.
South African firms have expanded in the southern Africa region on the basis of various
factors, including ‘market-seeking’ strategies in response to demand constraints in home
markets, as well as ‘asset or resource-seeking’ strategies to benefit from access to additional
raw material or productive resources (Verhoef, 2016). The expansion of firms also leverages
existing firm capabilities, managerial systems and technology developed in the home market
into new markets (Verhoef, 2016). While these activities relate to the growth and expansion of
firms, it is relevant that a number of large investments, as profiled in this research, are not
being made in South Africa which presents a domestic policy challenge in terms of a lack of
domestic investment.
Understanding the rationale underpinning major investments, internationalisation and
expansion by big businesses is thus critical to assessing the responsiveness of firms to state
incentives and interventions both in home and foreign markets. The investment trends of large
firms are likely to shape the country’s industrial development outcomes, and subsequently its
ability to embark on an inclusive and labour-absorptive growth trajectory. For industrial policy
to be effective there is a critical need to understand the investment trends, strategies and
decision-making of such firms, as the policy levers designed to influence the firms’ decisions
are unlikely to be effective in the absence of such an understanding.
The above forms an important part of the rationale for the Industrial Development Research
Programme (IDRP), funded by the DTI. This particular paper forms part of the IDRP which
also involved an assessment of food producing firms, Remgro Limited, listed firms in metals,
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machinery and equipment sectors, supermarket groups, and a study on procurement in rail in
South Africa.
In the context of the broader economy, investment refers to transactions that increase the
magnitude of real aggregate wealth. This mainly includes the purchase or production of new
real assets such as structures and equipment by businesses for production purposes.
Purchases of financial assets are not considered as part of ‘investment’ because financial
assets reflect credit relationships within the economy, rather than representing real net worth
for the economy (Parker, 2010). There are several competing models of firm investment which
are not discussed in detail here. Several models have been developed to better understand
and explain investment patterns (Porter, 2010). For this purpose it is important to note that
many of the theories fail to account for the role of retained profits in investment, as proposed
by the cash flow model. Faced with high costs of capital, firms can opt for investment
expenditure financed through internal reserves. This implies that investment is not only
dependent on output and cost of capital, but partly on the level of profits or expected profits
as well, which in turn influence available reserves. Therefore, it could be assumed that the
optimal capital stock is a function of expected profits. In this regard, it is argued that the desired
capital stock should be made dependent not on the level of output but instead on variables
which capture the level of profits or expected profits (du Toit and Moolman, 2004). In this
assessment we consider closely the extent of growth in company reserves or accumulated
profits in South Africa, viewed as a potential alternative source of capital which has seemingly
not been used by firms to finance productive investments.
Levels of investment in South Africa has not grown significantly since 2010. While real
aggregate investment measured in terms of gross fixed capital formation (and as a share of
real GDP) had increased from the early 2000s to around 2008, it has essentially levelled out
since then at around 10% of real GDP on average (Figure 1).
Figure 1: Gross fixed capital formation (% real output, 2010 constant prices) (1994-2016)
Source: StatsSA data
0%
2%
4%
6%
8%
10%
12%
-
1
2
3
4
5
6
7
R' T
rilli
ons
RGDP GFCF GFCF (% RGDP) (right axis)
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The structure of the South African economy is characterized by large firms with significant
amounts of retained profits, and persistent high levels of concentration reinforced by high
barriers to entry. Patterns of ownership in the economy are skewed in favour of the white
population, large conglomerates and incumbent firms, and family groups. Given the current
debates on structural transformation, understanding firms’ decisions is thus important so that
appropriate policy levers can then be designed to influence such decisions to yield more
inclusive, competitive and innovative development outcomes.
Against this backdrop, this project is a first step in tracking the investment activities of large
firms listed on Johannesburg Stock Exchange (JSE), and the rationale provided for the
investments. The key theme in this research is to understand the investments, decision-
making and investment strategies of large and lead firms as they relate to industrial
development in South Africa.
The study assesses listed companies for two primary reasons; first, these are large companies
which through their large investments (or lack thereof) influence investments within an
economy (or have potential to do so); and second, listed companies are obliged to publish
their financial statements which makes their data accessible. The available published data on
listed firms is generally not ‘mined’ and analysed in any detail from the perspective of
economic development policy and presents a rich source of information for understanding key
trends and patterns developing in the behaviour of large firms that may warrant further policy
consideration.
There are over 400 firms currently listed on the JSE. In this regard a sample of the 50 top
companies ranked by market capitalisation has been considered in this research. The study
considers market capitalisation as a means to rank the firms, rather than, say, revenue, given
different business models and nature of activity of firms. A revenue measure may skew the
rankings in favour of high volume commodity producers and retailers, for example. Ranking
by market capitalisation is also reflective of the value attributed by investors and capital, who
may be potential investors for other (black-owned) firms in the economy, to particular firms in
terms of their size, assets and potential for growth or not, and the underlying value of
companies.
It is of particular interest from a policy perspective how investments can be attracted to other
sectors and new enterprises, relative to large firms that are listed. However, to the extent that
shareholding on the JSE accounts for a significant proportion of equity investments in South
Africa, it is also relevant what the firms being invested in do with this financial capacity. Are
investments being made by large listed firms in new productive capacity and technologies, or
are large firms making limited fixed capital investments in South Africa, earning higher rents
from entrenched positions of market power in key industries, and simply passing on profits to
shareholders? Policy makers will have an interest in how to shape policy such that investments
are made in new capacity in South Africa in particular, and how to attract entry and investments
in developing firms across the economy. Lastly, it is important to consider the firms on the JSE
to the extent that there are debates about how the composition of the pool of the largest firms
and its ownership by different groups has changed and also remained the same since the
democratic transition. Key questions in this regard, although not considered in significant detail
in this report are whether the ‘face’ of ownership of the largest firms has changed, whether
black ownership has increased in these firms, and where there have been changes what has
been the impact in terms of outcomes and firm behaviour?
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The top 50 companies constitute 86% of the total market capitalisation on the JSE in 2017.
This motivates for considering the top 50 companies as a representative sample of lead firms
in the South African economy. Furthermore the top 50 is representative of a range of sectors
and industries which allows for consideration of aspects of investment behaviour and company
strategy that are perhaps specific to the arrangements and market conditions in a particular
industry. The top 50 has representation in 8 out of the 10 industries represented on the JSE
as informed by the JSE’s ICB industry classification benchmark.
Although the top 20 firms could also be considered as a sample, given they constitute 71% of
cumulative market capitalisation, the problem comes when outliers or other firms that do not
meet the objectives of the study have to be removed. The fact that 20 firms constitute 71% of
the market capitalisation is a significant finding on its own, pointing to significant concentration
of value and control in the economy. As demonstrated below, there are dual listed companies
that do not have significant operations in South Africa. These are very significant in terms of
market capitalisation, and as a result their removal could easily reduce the top 20 ‘sample
size’ (71%) to less than 50% of market capitalisation. Furthermore, although the top 20
companies have a significant representation in terms of market capitalisation, the top 20
companies on the JSE do not adequately represent the exchange in terms of sectors and
industries covered.
Table 1: Share of total market capitalisation March 2017
Firms Cumulative market capitalisation %
Top 10 58%
Top 20 71%
Top 50 86%
Top 100 95%
Source: InetBFA
2. Overview of stock markets
The stock market provides a platform on which shares of publicly held companies are issued
and traded. Companies issue shares in lieu of capital to finance operations while investors
receive shares that give them a claim on the profits and overall growth of a company. When
companies are profitable, stock market investors make money through the dividends
companies pay out and by selling appreciated stocks at a profit referred to as capital gain. The
downside is that investors can lose money if the companies whose stocks they hold decrease
in value which results in the stocks’ prices decreasing. This leads to losses for the investors if
stocks are sold at low prices (Brown, 2012).
The value of shares is determined by the expected future profits of a company; if investors
expect high future profits share prices increase, while low future profit expectations have the
opposite effect on the price. Future profits expectations are affected by a range of factors that
include: the business model of the company, quality of management; research and
development, growth of historic profits, quality of projects in the pipeline and the competitive
position of the firm (Ahmadi, 2017).
2.1 Structure of the stock market
A stock exchange is structured into two markets, the primary and secondary market. The
primary market is where companies issue shares for the first time to the general public; this is
the market where firms raise capital and the only market that firms are part of. The secondary
market is where investors trade shares amongst themselves after the shares have been sold
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for the first time in the primary market. On the secondary market, investors require a broker to
purchase the securities on their behalf and the price paid includes brokerage fees.
2.2 The role of the stock exchange
The capital market is a common feature of every modern economy and is reputed, amongst
other things, to perform critical capital allocation functions which promote economic growth
and stimulate orderly industrial development. In many advanced countries where capital
markets correlate directly with the economy, the capital market is viewed as the primary gauge
for the economy’s performance (Aklahyel, Askira & Gaya, 2014). Furthermore, capital markets
with adequate depth play an essential role in economic development since they are the
principal platform through which low cost funds are mobilised to finance medium to long term
projects on infrastructure and other productive assets. In the South African context, capital
markets can foster diversification of the country’s economic base which is largely mining and
financial services dependent and assist economic agents to pool, price and exchange risk
thereby encouraging savings and investments and ultimately creating wealth. The capital
market also helps to channel capital or long-term resources to firms with relatively high and
increasing productivity thus enhancing economic growth and industrial development.
Development of firms and the establishment of small, medium and large scale companies and
industries are critical for the growth of economies, a process in which the capital market has
a critical role to play. Industries can grow if, among other things, enough funds are available
for take-off and expansion. In turn, industrialisation and industrial development is a
prerequisite for the economic take-off or economic developments of any country, and central
to breaking a cycle of poverty and underdevelopment (Tregenna, 2011; Kucera & Milberg,
2003; and Rowthorn & Coutts, 2004). To achieve this, adequate access to capital is a
prerequisite.
However, successful industrial development is highly dependent on how the raised capital and
the resultant profits are utilised. Firms often invest in non-productive assets. For example,
mergers and acquisitions result in increased revenue and earnings that increase the value of
the shares and benefit shareholders. However, in the context of industrialisation and economic
growth, mergers and acquisitions are a consolidation of existing operations that does not
necessarily increase output at a macro level or increase employment within an economy. An
important downside of a pattern of investment based on a narrow focus on mergers and
acquisitions is also that sectors can become increasingly concentrated often leading to poor
competitive outcomes.
There are also other aspects relating to the globalisation of financial capital which may present
challenges from the perspective of developing industrial capacity domestically. This relates in
particular to the fact that internationalised firms may use the openness of capital markets to
extract much needed capital from an economy. We discuss these issues below in relation to
some of the large firms included in the Top 50 list.
2.3 Cross and dual listings
Cross listing is the listing of any security on two or more different exchanges. Cross listing
accomplishes two things for an issuer. First, it tends to increase the liquidity of the security
because there are more places to buy and sell, there are more participants in the market, and
there is sometimes more time to trade the stock (if the exchanges are in different time zones).
Second, it helps the issuer raise more capital because it makes more investors available from
other markets and gives the company more exposure potentially lowering the cost of capital
in the process. Depending on how the cross listing is structured it may have adverse effects
on different countries. Cross listing may be used as a conduit to extract capital from a country;
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in a case where the cross listed company does not have significant operations in a country
where it is listed, the extracted funds will not benefit the country that has provided capital. The
opportunity cost, other things equal, is that this capital could be an investment within the
country where the capital is sourced that could potentially contribute to employment and
economic growth.
Dual listings on the other hand are effectively mergers between two companies (in different
countries) in which the companies agree to combine their operations and cash flows, but retain
separate shareholder registries and identities (Bedi, Richards, & Tennant, 2003). In this
respect, a dual listing is quite different to a cross listing. Whereas a dual listing involves the
(quasi) merger of two separate entities, a cross listing occurs when an individual company
establishes a secondary listing on a foreign exchange. One form of dual listing involves two
companies transferring their assets to one or more jointly owned subsidiaries or holding
companies. The holding company then passes dividends back to the main companies, which
distribute them according to a predetermined ratio. Alternatively, instead of the transfer of
assets, there may be contractual arrangements to share the cash flows from each other’s
assets. The operations of the two companies are closely coordinated, and in most cases the
companies share a common board of directors (Hancock, Phillips & Gray, 1999). The main
reason for adopting a dual listing structure is to minimise capital gains tax and other tax
obligations that would result from a conventional merger (Smith & Cugati, 2001). There are
also other considerations that include maintaining national identity or corporate status of both
dual listed companies and avoiding accounting complications that come with a conventional
merger deal such as goodwill accounting.
3. Overview of the Top 50 and company sectors
The top 50 firms have been ranked based on market capitalisation. Market capitalisation refers
to the total market value of a company's outstanding shares. It is reflective of the size of a firm
and the magnitude of its operations. As noted above, revenue may also be utilised to rank the
firms, however because of the diversity amongst the firms being analysed, a revenue based
ranking could be biased. For example, for the investment services firms considered a
significant portion of income (share of profits from joint ventures and associates) is not
classified as revenue such that a revenue based ranking will be skewed. This section begins
by considering key changes (and continuity) in the composition of the JSE top 50 since 2000.
3.1 Key trends in the composition of the JSE top 50
Table 2 below shows the top 50 companies ranked from the largest to the smallest based on
market capitalisation. The average company size in terms of market capitalisation is R229
billion while the largest (SAB Miller) and smallest (Pioneer Foods) companies are R2388 billion
and R39 billion, respectively. The average value is significantly skewed by the larger
capitalisation attributable to entities such as SAB Miller. As can be seen in the table below 8
out of the top 10 companies are cross listed2 companies, together constituting 54% of the total
2 SAB Miller through Anheuser-Busch InBev SA NV has other listings on the Bermuda Stock Exchange, Euronext Brussels Stock Exchange and Mexico Stock Exchange. British American tobacco has a primary listing on London stock exchange while Naspers is also listed on Nasdaq Stock Market. Glencore has listings in London Stock Exchange and Hong Kong Stock Exchange while Richemont and Steinhoff are also listed on Schweizer Borse Swiss Exchange and Frankfurt Stock Exchange, respectively. BHP Billiton has other listings on London Stock Exchange and Australian Stock Exchange.
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JSE market capitalisation. To the extent that these firms are cross listed with significant
operations outside of SA, they are perhaps less illustrative of firm decision making as it relates
to industrial development in South Africa. The only companies in the top 10 with significant
South African operations based on share of revenue are Standard Bank and Firstrand Ltd.
Table 2: JSE Top 50 by market capitalisation (R billion), 2000 and March 2017
Top 50 2017 Sector
2017 Market
Cap (R’ billion)
% of total JSE market cap (2017)
Top 50 (ranked in
2000)
1. SAB Miller Consumer Goods 2388 17.8% Anglo American Plc
2. British American Tobacco Consumer Goods 1654 12.3% Richemont Securities
3. Naspers Ltd Consumer Services 922 6.9% De Beers Consol Mines
4. Glencore Plc Mining 788 5.9% Anglo American Plat
5. Compagnie Fin Richemont Consumer Goods 504 3.8% Old Mutual Plc
6. BHP Billiton Plc Mining 458 3.4% Billiton Plc
7. Firstrand Ltd Banking 290 2.2% Dimension Data Hldgs
8. Anglo American Plc Mining 286 2.1% Firstrand Ltd
9. Steinhoff Int Hldgs N.V. Consumer Goods 282 2.1% Standard Bank Invcorp
10. Standard Bank Group Ltd Banking 255 1.9% Nedcor Ltd
11. Sasol Limited Specialty Chemicals 242 1.8% S A Breweries Plc
12. MTN Group Ltd Telecoms 234 1.7% M-cell Ltd
13. Vodacom Group Ltd Telecoms 220 1.6% Sasol Ltd
14. Old Mutual Plc Insurance 177 1.3% Impala Platinum Hlgs
15. Sanlam Limited Insurance 148 1.1% Sanlam Ltd
16. South32 Limited Mining 142 1.1% Remgro Ltd
17. Barclays Africa Grp Ltd Banking 130 1.0% Anglogold Ltd
18. Nedbank Group Ltd Banking 129 1.0% Investec Group Ltd
19. Aspen Pharmacare Hldgs Health Care 125 0.9% Lonmin P L C
20. Remgro Ltd Investment services 118 0.9% Absa Group Limited
21. Mondi Plc Paper 113 0.8% Liberty Group Ltd
22. Shoprite Holdings Ltd Consumer Services 111 0.8% Liberty International Plc
23. RMB Holdings Ltd Investment services 93 0.7% Johnnic Holdings Ltd
24. Bid Corporation Ltd Consumer Services 91 0.7% Johnnic Communications
25. Mediclinic Int Plc Health Care 87 0.7% Bidvest Ltd Ord
26. Capitec Bank Hldgs Ltd Banking 85 0.6% Sappi Ltd
27. Discovery Ltd Insurance 81 0.6% Imperial Holdings Ltd
28. Anglo American Plat Ltd Mining 81 0.6% Gold Fields Ltd
29. Tiger Brands Ltd Consumer Goods 81 0.6% Gencor Ltd
30. Growthpoint Prop Ltd Property 76 0.6% Tiger Brands Ltd Ord
31. Woolworths Holdings Ltd Consumer Services 75 0.6% RMB Holdings Ltd
32. Hammerson Plc Property 75 0.6% BOE Ltd Ord
33. Kumba Iron Ore Ltd Mining 66 0.5% Barloworld Ltd
34. Rand Merchant Inv Hldgs Investment services 62 0.5% Venfin Ltd
35. Investec Plc Investment services 62 0.5% Investec Holdings Ltd
36. Intu Properties Plc Property 61 0.5% Liberty Holdings Ltd Ord
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37. Redefine Properties Ltd Property 61 0.5% Tigon Ltd
38. PSG Group Ltd Investment services 59 0.4% Pick n Pay Stores Ltd
39. Anglogold Ashanti Ltd Mining 56 0.4% Metropolitan Life Ltd
40. Reinet Investments S.C.A Investment services 55 0.4% Coronation Hldgs Ltd
41. Bidvest Ltd Industrials 53 0.4% Amalgamated Beverage Industries
42. New Europe Prop Inv Plc Property 48 0.4% Nampak Ltd
43. Resilient Reit Limited Property 48 0.4% Alexander Forbes Ltd
44. Sappi Ltd Paper 46 0.3% Fedsure Holdings Ltd
45. Netcare Limited Health Care 45 0.3% Steinhoff Interntl Hldgs
46. Mr Price Group Ltd Consumer Services 43 0.3% MIH Holdings Ltd
47. MMI Holdings Limited Insurance 40 0.3% Datatec Ltd
48. Capital&Counties Prop Pl Property 40 0.3% New Africa Investment
49. Truworths Int Ltd Consumer Services 39 0.3% Naspers Ltd
50. Pioneer Foods Group Ltd Consumer Goods 39 0.3% Discovery Holdings Ltd
Source: InetBFA
The table also indicates the top 50 firms ranked by market capitalisation in 2000 to assess the
extent to which there has been continuity, but also change in the composition of the largest
firms in South Africa. The South African lead firms by sector haven’t changed significantly
since 2000, especially within the top 50 firms, although the order of firms may have changed
in some cases. That is, within the top 50 firms, several sectors including banking, mining,
consumer goods, consumer services, insurance and investment services have remained
essentially the same in terms of firms represented over the period (Table A in the appendix),
perhaps indicating entrenched positions of these firms in the sectors in which they operate.
For example, there are high barriers to entry in retail banking (Makhaya & Nhundu, 2015),
such that the four large retail banks (Firstrand, Standard Bank, Nedbank and Absa) have
remained in the top 20 since 2000. These banks have roughly maintained their actual positions
in the top 50 with the exception of Nedbank which has fallen seven places ut remains in the
top 20.
In fact there is indication of consolidation and increased concentration in insurance and
investment services evidenced by decline in the number of firms represented in the top 50.
Major decline in investment services firms happened between 2000 and 2005 due to various
factors including restructuring, and mergers and acquisitions. i.e., the acquisition of BOE Ltd
by Nedbank in 2002, the consolidation of Investec Group Ltd and Investec Holdings Ltd to
form Investec Plc, the fact that Tigon Ltd went out of business in 2005, the unbundling and
delisting of Coronation Holdings Ltd to form Coronation Fund Managers in 2003, and the
unbundling of Johnnic Holdings Limited in 2005. However, companies such as Remgro Ltd,
Investec and RMB Holdings Ltd have maintained relatively stable positions across these
years.
Certain firms have experienced rapid growth in value since 2000, which is perhaps reflective
of broader shifts in the economy such as the decline in mining or rapid growth and/or
consolidation of certain service-related businesses and investment groups. Discovery,
primarily involved in insurance, is now ranked 27th from 50th in 2000. A major change in terms
of insurance companies happened between 2000 and 2005 due to the removal of Metropolitan
Life Ltd following the merger with Momentum to form MMI Holdings; and the delisting of
Alexander Forbes in 2007. Liberty Group fell away between 2005 and 2010. Interestingly,
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companies such as Old Mutual Plc and Sanlam Ltd with long-standing interests in the South
Africa economy have maintained their presence in the JSE Top 50 and their rankings.
Other firms, such as PSG Group, emerged in the top rankings after 2005. Similarly, Steinhoff
International Holdings was ranked 7th in 2015 from around 30th in 2010. This rapid increase in
value is largely due to the acquisition of Europe’s second largest retailer of home furnishings
(Conforama) in 2011. The acquisition led to an 87% increase in revenue between 2011 and
2012.3
There was still a substantial role for mining companies despite more challenging economic
conditions on the past five years. Firms in the mining sector had climbed in terms of rankings
and number in the JSE Top 50 between 2000 and 2010. This was partly due to the global
commodity price boom, particularly the boom in the prices of precious and other industrial
metals on the back of rising demand from emerging markets such as China. This period saw
the emergence of Exxaro Resources Ltd, African Rainbow Min Ltd, Assore Ltd and Uranium
One Inc. There was also substantial restructuring of companies such as the unbundling of
Kumba Resources to form Exxaro Resources Ltd and Kumba Iron Ore in 2006. However, firms
in the sector declined from 2010 onwards partly due to heavy strikes that erupted since 2012,
and unfavourable commodity prices. BHP Billiton declined from the 1st position in 2010 to 5th
in 2015, Anglo Platinum Ltd declined from the 8th position to 40th, and Anglogold Ashanti Ltd
declined from 13th position to 44th in the same period. Other companies including Impala
Platinum Holdings, Lonmin Plc and Gold Fields fell away completely from the JSE Top 50
between 2010 and 2015. Restructuring processes partly contributed to the decline of the
sector, for instance; Gold Fields Ltd unbundled in 2013, leading to the formation of Sibanye
Gold; and the share prices of mining companies with operations in Zimbabwe declined
following news regarding the Zimbabwean government’s implementation of laws which
required local ownership of mining companies. In summary, the noticeable shifts in the mining
sector appear to be underpinned by changes in market conditions rather than a structural shift
in the nature of activities in the economy, which is an important area for further research.
Of particular significance since 2000 is the high levels of internationalisation of large
businesses in South Africa; the emergence of property and health care firms; and the decline
of certain technology and media companies. A significant number of large firms in South Africa
are cross listed and/or have considerable operations outside South Africa. The entire Top 50
consists of 23 cross listed companies, accounting for 65% of the total JSE market
capitalisation. This indicates high levels of internationalisation of firms on the JSE although
considering the extent of cross listing alone has its limitations and is a somewhat conservative
indicator given it does not include firms that are not cross listed but that have significant
international operations.
Notably some companies do not have operations at all in South Africa, which is an especially
concerning feature of the property sector wherein firms have grown significantly in terms of
market capitalisation. Specifically, Hammerson Plc, Intu Properties Plc, New Europe Property
Investments Plc and Capital & Counties Properties Plc, all in the property sector, do not have
significant operations in the country. These firms’ strategies do not articulate any future
investment plans in South Africa, suggesting that foreign companies use South Africa as a
source of capital to be invested abroad, effectively the same rationale provided by South
3 Steinhoff International 2012 annual report p.27
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African firms for seeking dual listing in international markets in the late 1990s (Chabane et al,
2006).
When the 23 multi-listed companies are excluded from analysis, only 27 companies of the top
50 are left accounting for about 20% of total JSE market capitalisation. This assessment
illustrates an important point. When accounting for internationalisation, cross listing, and the
extent of operations actually in South Africa, the number and value of remaining firms on the
JSE is significantly reduced.
Moreover, all the remaining firms on the JSE account for only 35% of the total JSE market
capitalisation. These firms basically represent ‘the real South African JSE’. In this context,
estimates of black ownership may actually be unhelpful if they do not account for levels of
internationalisation and whether companies owned by an increasing number of black South
Africans actually have operations in South Africa. That is, firms within the “real JSE” are the
ones for which black ownership should really matter, and increasing black ownership and
industrial development support for companies with significant operations in South Africa
should matter most given they can contribute to investment, employment and productive
growth domestically.
There has been significant entry of property management and health care companies.
Property management firms emerged between 2005 and 2010 through Capital Shopping
Centres Group Plc (now Intu Properties plc) and Growthpoint Prop Ltd to seven4 companies
in 2017. As highlighted above, the majority (4 out of 7) of these companies are extensively
internationalised, with no operations in South Africa. Furthermore, even the remaining
‘localised’ property management firms are not necessarily involved in building new property
investments in South Africa. As such, the sector cannot be considered a driver of economic
development, particularly due to its low labour absorption ratios (Tregenna, 2012). The same
can be said of the significant growth of firms in the health care sector and health insurance,
which has significant cross-ownership ties to the Remgro family and conglomerate group in
particular.5
The decline in technology and media firms is also worth noting given the links these firms have
to modern technology platforms in particular. Dimension Data Holdings annual reports indicate
a decline in market capitalisation from 2000 onwards. Johnnic Communications unbundled in
2005, and Datatec Ltd in 2001. Mih Holdings Ltd, a subsidiary of Naspers, was delisted in
2002 following a restructuring process by Naspers. Thereafter Naspers became the only
company featured in the JSE Top 50 in the technology and media sector. In fact Naspers
improved significantly from 49th position in 2000 to the 3rd position in 2017, largely due to an
acquisition of a 35% stake in a Chinese gaming and technology company (Tencent) in 2001.
Tencent has grown by over 200 times since then.6
3.2 JSE Top 50 by sector
Analysis of the top 50 companies will be carried out at sectorial level7 based on the main
business activities of the firms. Some firms may have subsidiaries involved in different lines of
business from the holding firm however in these classifications the dominant line of business
4 Hammerson Plc, Capital Shopping Centres Group Plc, Growthpoint Prop Ltd, Intu Properties Plc, New Europe Property Investments Plc and Capital & Counties Properties Plc 5 See Warning on Remgro and Afrocentric surprises healthcare market inquiry 6 See Why the sky is the limit for Naspers’ share price
12
of the holding company is considered. Extensively diversified firms such as Bidvest Ltd that
have activities across multiple product sectors as part of the main operation of the business
are grouped together under the ‘Industrials’ sector. A breakdown of the sectors represented
by the top 50 is provided below (Table 3).
Table 3: JSE Top 50 firms in 2017, by sector
Banking Consumer goods Consumer services Health care
Barclays Africa Ltd Capitec Bank Ltd Firstrand Ltd Nedbank Group Ltd Standard Bank Ltd
SAB Miller British American Tobacco Compagnie Fin Richemont Steinhoff Int Hldgs N.V. Tiger Brands Ltd Pioneer Foods Group Ltd
Shoprite Holdings Ltd Bid Corporation Ltd Woolworths Holdings Ltd Mr Price Group Ltd Truworths Int Ltd
Aspen Pharmacare Hldgs Mediclinic Int Plc Netcare Limited
Investment services Mining Paper Property
Investec Plc PSG Group Ltd Rand Merchant Inv Hldgs Reinet Investments S.C.A Remgro Ltd RMB Holdings Ltd
Anglo American Plat Ltd Anglo American Plc Anglogold Ashanti Ltd BHP Billiton Plc Glencore Plc Kumba Iron Ore Ltd South32 Limited
Mondi Plc Sappi Ltd
Capital&Counties Prop Pl Growthpoint Prop Ltd Hammerson Plc Intu Properties Plc New Europe Prop Inv Plc Redefine Properties Ltd Resilient Reit Limited
Industrials Insurance Specialty chemicals Telecommunications
Bidvest Ltd
Discovery Ltd MMI Holdings Limited Old Mutual Plc Sanlam Limited
Sasol Limited
MTN Group Ltd Vodacom Group Ltd
Internet and media
Naspers Ltd
Source: INET BFA data
The banking sector comprises organisations that have banking as a dominant primary activity
while the consumer goods sector is made up of firms that produce final goods for consumers
rather than manufacturers of inputs for producing other goods. The consumer services sector
comprises companies that largely distribute consumer goods to the final users, for example
supermarkets and clothing outlets while the health care sector is made up of hospitals and a
pharmaceutical company. Investment services companies are generally holding companies
and firms that primarily invest in both listed and unlisted financial instruments and firms. The
insurance sector consists of life and health insurance firms.
The lead sectors in terms of market capitalization of the JSE Top 50 are consumer goods
(45%), mining (17%), internet and media (8%), and banking (8%). The major contributors
falling within the consumer goods sector are the cross listed entities SAB Miller and British
American Tobacco Plc. These companies constitute 35% of the entire JSE Top 50 market
capitalization which is more than two times larger than the contribution of the whole mining
sector. Because of the scale of these entities they tend to skew the analysis, so much so that
it is difficult to analyse the dynamics amongst relatively smaller entities (Figure 2). In the
second panel of figure 2 SAB Miller and BAT are excluded for illustrative purposes.
13
Figure 2: Composition of the JSE Top 50 with and without BAT and SAB Miller (March 2017)
Source: INET BFA
Note: Market capitalisation percentage is based on the total market capitalisation of the top 50 firms.
When SAB and BAT are removed from the top 50, the composition in terms of market
capitalisation changes with mining becoming the largest sector. This illustrates the significant
impact that a few cross listed companies can have on the analysis of the top 50. There are
other cross listed companies (other than BAT and SAB) that have the potential to skew results
in the same way. We assess this and the treatment of these firms within the analysis below.
3.3 Effect of cross listings
As mentioned cross listed companies are entities who list their shares on one or more
foreign stock exchanges in addition to their domestic exchange. This is largely meant to
increase the liquidity of shares and reach out to global investors to improve an entity’s capacity
to raise funds. As noted in the previous section two of the largest multinational companies
listed on JSE (SAB and BAT) currently constitute 35% of JSE’s total market capitalisation.
However, in most cases, a significant number of cross listed companies’ shares are not owned
significantly or traded on JSE. This also puts into perspective recent debates around the
composition of ownership on the JSE in terms of black ownership. These particular firms are
largely owned by shareholders outside of South Africa, which skews the proportion of foreign
and domestic ownership (and that by black South Africans) which is actually attributable to
firms that have a significant proportion of their operations in South Africa. Said differently, the
extent of ownership by black South Africans of firms that operate and invest in South Africa is
likely to be much lower than aggregate figures stated in recent debates.
BAT only has 15%8 (290 million shares out of a total of 1.9 billion shares) of its shares that are
on the South African branch register. Similarly, a large share of these entities’ operations are
based outside South Africa when considered in terms of the distribution of revenue. The share
of revenue attributable to South African operations (based on companies that reported the
breakdown) is as follows: Naspers 5.5%, Richemont 8%, BAT 18%, South32 10% and Anglo
8 See British American Tobacco 2015 Annual Report p.114
0%1%2%2%3%4%4%4%4%
8%8%
17%45%
0% 10% 20% 30% 40% 50%
IndustrialsPaper
Specialty ChemicalsHealth Care
Consumer ServicesProperty
InsuranceInvestment ServicesTelecommunications
BanksInternet and Media
MiningConsumer Goods
Market cap %
Composition including BAT and SAB
1%2%
3%3%
5%5%6%6%6%
12%12%12%
25%
0% 5% 10% 15% 20% 25% 30%
IndustrialsPaper
Specialty ChemicalsHealth Care
Consumer ServicesProperty
InsuranceInvestment ServicesTelecommunications
BanksConsumer Goods
Internet and MediaMining
Market cap%
Composition excluding BAT and SAB
14
American Plc 7%. As a result given the focus of the study, these firms are perhaps less
relevant when considering firm investment decisions as they relate to industrial development
in South Africa.
There is also a concern when one considers some of the industries in which these entities
operate in terms of consumer goods, being beer production in the case of SAB and tobacco
for BAT. These tend to be sectors that do not (in terms of the nature of operations and value
chain) have strong linkages with high value adding downstream economic activity unlike
sectors where firms are involved in the production or manufacturing of key inputs to
downstream production (Tregenna 2012; and Felipe, Kumar & Abdon 2012).
In this context, our approach has been to consider more closely the significant effect that large
cross listed companies of this nature can have on the interpretation of the available data on
investments made. As a result, some parts of the analysis will exclude cross listed companies.9
There will be a section under investments and acquisitions that will separately analyse the
investment activities of these cross listed companies in South Africa.
4. Key performance metrics
This section considers key performance metrics for the top 50 firms, focusing on profitability
and investments. As discussed in the previous section, much of the analysis will exclude the
large cross listed companies largely because of their insignificant operations in South Africa.
In this regard, eight cross listed companies10 have been omitted from the analysis that follows.
Investment activities of these entities will be analysed separately under section 4.3.
4.1 Profitability
Revenue and profitability are strong determinants of investments; firms are driven largely by
returns and as a result they are inclined to spend more on investments (capital expenditure or
acquisitions) when their operations are profitable and prospects for further growth are high. In
this section we analyse profitability and retention rates; and the extent to which they have
impacted investment behaviour. Figure 3 below shows total revenue by sector between 2011
and 2015 at 2015 constant prices.
9 BAT, SAB Miller, Anglo American plc, Glencore plc, BHP Billiton, Richemont. Naspers and South32. 10 See previous note.
15
Figure 3: Total revenue by sector (2015 constant prices), 2011-2016
Source: InetBFA
Over the period under review, total revenue increased by 52% from R1.7 trillion in 2011 to
R2.6 trillion in 2015. Revenues are largely attributable to the banking, consumer services and
consumer goods sector that constitute 19%, 14% and 13%, respectively based on 2016
figures. In terms of revenue growth, consumer goods exhibited the highest growth rate of 24%
(Table 4).
In this sector growth is largely driven by Steinhoff International whose revenue has grown by
100% (CAGR 19%) over the period under review. Steinhoff’s growth was driven mostly by
strategic acquisitions and investments over the period under review.11 Between 2011 and
2012 Steinhoff International’s revenue increased by 87% after the acquisition of Conforama –
a European household goods retailer.12 Similarly, between 2014 and 2015 there was also a
significant increase in revenue after the acquisition of Pepkor (their largest corporate
transaction to date) a South African based investment and holding company with business
interests in Africa, Australia, United Kingdom, Poland, Slovakia and New Zealand. In the 2016
financial year, Steinhoff also acquired Mattress-Firm, a multi-brand mattress retail chain in the
United States, Groupe Cofel (Cofel) – the leading mattress manufacturer in France, Poundland
in the United Kingdom, Tekkie Town in South Africa and Fantastic Holdings in Australia.
Notably, revenue growth in consumer services companies in 2016 (22%) is largely because
of the inclusion of Bid Corporation that reported for the first time in 2016 (11% growth if Bid
Corporation is excluded).
11 See also Acquisitions bolster revenue at Steinhoff 12 Steinhoff International 2012 Annual Report p.27
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2011 2012 2013 2014 2015 2016
Revenue (
R'T
rilli
on)
Banks Consumer Services Consumer Goods Telecommunications
Industrials Paper Insurance Specialty Chemicals
Mining Health Care Investment Services Property
16
Health sector growth of 22% per year on average is essentially as a result of Aspen Holdings’
significant acquisitions (mostly out of South Africa) over the period.13
Table 4: Total revenue and revenue growth by sector 2011 and 2016 (2015 constant prices)
2011 (R'000) 2016 (R'000) CAGR
Banks 358 454 969 486 115 757 6%
Consumer Services 138 376 168 367 146 531 22%
Consumer Goods 112 445 948 324 977 262 24%
Telecommunications 217 832 886 227 997 000 1%
Industrials 141 050 876 196 098 395 7%
Paper 136 478 583 184 456 193 6%
Insurance 98 304 787 178 668 979 13%
Specialty Chemicals 169 285 771 172 942 000 0%
Mining 178 642 857 164 220 443 -2%
Health Care 43 195 547 117 764 030 22%
Investment Services 77 280 310 116 137 923 8%
Property 22 926 177 40 845 539 12%
Source: InetBFA
Note: Consumer goods grew by 22% largely because of Bid Corporation that reported for the first time
in 2016 - if Bid Corporation is omitted growth is only 11%.
In contrast growth in revenue in mining (-2%), banking (6%), specialty chemicals (Sasol) (0%)
and telecommunications (1%) has been low. The mining sector was largely affected by the
strikes of 2012/2013 while the decrease in commodity prices from 2014 onwards also had a
significant negative effect on revenue. The slow growth in revenue in the banking sector could
partly be a result of Capitec’s entry into the retail banking sector that sparked a competitive
reaction from incumbents, as a result of which bank charges decreased persistently between
2011 and 2014 (Makhaya & Nhundu, 2015). Sasol’s 0% CAGR (as the only firm in the specialty
chemicals grouping) is a result of low oil prices that prevailed 2014/201514, depreciation of the
rand between 2013 and 2015; and poor investments that resulted in R11.5 billion being written
off.15 The telecommunications sector was largely affected by MTN’s R9.3 billion fine in
Nigeria,16 change in structure of the industry as consumers shift from voice to data which is
relatively cheaper17 and increased market competition.18
In Figure 4 below we compare the profitability of sectors under review. Although profitability is
considered by sector here, we note the importance of assessing changes within a particular
‘sector’ at the company level. Profitability is assessed by two metrics, return on assets (ROA)
and return on equity (ROE). Return on assets is an indicator of how profitable a company is
relative to its total assets and gives an idea as to how efficient management is at using its
assets to generate earnings. Return on equity on the other hand measures a corporation's
profitability by revealing how much profit a company generates with the money shareholders
13 Aspen Holdings’ significant acquisitions over the period include Arixtra and Fraxiparine brands from GSK, API manufacturing and infant nutritional assets from Nestle. 14 Sasol 2015 Annual Report p.17 15 See more Sasol’s share price drops most in 17 years as North American adventure sours 16 MTN 2014 and 2015 Annual Report 17 Vodacom 2014 Annual Report 18 See note 16
17
have invested. It is measured by comparing a firm’s profits to the total equity. The percentage
difference between these two ratios signifies the extent to which an entity utilises debt to
finance its assets (financial leverage). A low percentage difference between the ratios signifies
low debt in the capital structure; while a high percentage difference indicates a high financial
leverage, a feature that is typical of banks and other financial service companies.
In terms of profitability, consumer services exhibited the highest return on assets averaging
20% per year. This could be a result of low assets that are required in the supermarkets and
clothing retailer industry. Consumer services also exhibited the second highest return on
equity suggesting a high level of profitability in this sector.
Firms in the telecommunications industry also reported high profitability (ROA 17% & ROE
38%) over the period under review. There was a significant decrease in profitability in 2015
which was a result of MTN Nigeria’s regulatory fine provision (R9.3 billion). Interesting to note
is the high difference between ROA and ROE which suggest a high leveraged asset base.
Banks and the insurance sector posted the lowest ROA of around 2%, which is a result of the
capital structure of the financial services sector. Banks and insurance companies are highly
leveraged and own a significant amount of assets that are financed by debt (loan book
balances financed by deposits, asset portfolios financed by pension fund contributions etc.).
Analysis of ROE shows that banks are the 4th most profitable sector with a ROE of 18% on
average.
In the mining sector profitability decreased over the years from a ROA of 20% to -3% between
2011 and 2015, which decrease significantly brings down the average ROA to 11%.
Profitability in the mining sector was largely affected by decrease in commodity prices from
around 2014 onwards as well as the mining strikes of 2012/ 2013 financial years.
Figure 4: Sector average profitability (2011 – 2016)
Source: InetBFA
0%
5%
10%
15%
20%
25%
30%
35%
40%
Return on assets Return on equity
18
4.2 Retention rates and reserves19
In general, certain firms and indeed groupings of firms in terms of sectors have exhibited fairly
high profitability and it may thus be expected that firms face incentives to invest in expanding
capacity, other things being equal. However, firms also have to comply with company policies
in terms of paying dividends before funds can be diverted to investment projects or reserves.
Important to note is the fact that dividends are not mandatory, firms only offer dividends when
they feel they can afford to forgo investment as part of company policies and internal
strategies. As a result companies that have high retention rates20 are viewed as high potential
growth companies that invest substantially in new productive assets. Firms with low retention
rates are usually companies that no longer have expansion capacity or do not plan to invest
in new projects such that funds will not be retained within the organisation earning low returns
and will instead be distributed to shareholders as dividends (Lally, 2013; Johnson and Soenen,
2003). Figure 5 below illustrates average retention rates per sector and Figure 6 shows overall
average retention rates of the top 50 firms over time.
Figure 5: Average sector retention rates
Source: InetBFA
In general there are high retention rates amongst the companies examined averaging 62%
between 2011 and 2015 (Figure 5). In terms of sectoral dynamics, property, paper, internet
and media; investment services and industrials sectors ranked highest in terms of high
retention rates. In contrast the mining, consumer services and telecommunications sectors
exhibited retention rates of less than 50%. The mining sector was largely affected by low
profitability over the period while low retention rates in the consumer services sector could be
as a result of the structure of the industry that does not require significant investment in large
assets. The telecommunications sector’s retention rates are affected largely by Vodacom
Group’s dividend policy of paying out on average 90 percent of profits as dividends. Vodacom
19 Reserves are balances on distributable reserves which are driven by retained profits. 20 Retention rate is the proportion of profits that is kept within the organisation after paying dividends.
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
Rete
ntion r
ate
s
19
Group’s dividend policy is largely as a result of the fact that the organisation does not have
much debt and currently has limited projects to invest in; consequently in its view, paying out
a higher dividend is the most efficient use of cash.21
Company reserves have grown from R242 billion to R1.4 trillion (Figure 6) between 2005 and
2016. This demonstrates the potential for firms to invest more as firms hold significant reserves
that can be invested at zero interest costs. Indeed this may augment investments across firms
which stood at R179 billion in 2016 and averaged R113 billion per year between 2005 and
2016. The accumulation of reserves contradicts the view that a lack of saving has undermined
a lack of investment in South Africa. Indeed, household savings have remained
problematically low in the past two decades. However, the assessment above demonstrates
that firms, at least in recent periods, have had access to sources of retained or accumulated
earnings which could have been used for additional productive investments.
Figure 6: Reserves and investment (capital expenditure)
Source: InetBFA
Note: Closing balances on distributable reserves have been utilised as a proxy for reserves. Reserves
exclude cross listed companies (see section 3.2)
Investment and movement (change) in reserves between 2005 and 2016 (Figure 7) shows
that the amount contributed to reserves on an annual basis decreased significantly between
2005 and 2009 (R110 billion) and during the same period real investment increased by a
substantial amount (R51 billion). This is the only period where the amount invested was more
than funds placed in reserves. The increase in investment during this period may be explained
by firms’ high demand and expenditure relating to the world cup, amongst other factors
21 See Vodacom pays out R3.8bn dividend
0%
10%
20%
30%
40%
50%
60%
70%
80%
-
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Rete
ntion r
ate
(%
)
R' T
rilli
on
Retention rates (right axis) Total reserves Investment 2015 constant prices
20
including favourable commodity prices in the early 2000s. Reserves during the same period
may have been used to fund this investment, which may explain the decrease. Around 2008
and 2009 there is likely to have been an impact on reserve accumulation relating to pressure
on companies and demand arising from the global economic slowdown.
From 2010 onwards both investment and funds contributed to reserves (total per year)
increased steadily however there is a clear, albeit relatively narrow, gap (Figure 7) which
indicates that firms were contributing more money to reserves than investments. This may
also have been significantly affected by greater caution exercised by firms in the years
following the economic crisis, although this does not explain continued accumulation in later
years.
Figure 7: Analysis of reserves and investments (2015 constant prices)
Source: InetBFA
A breakdown of average yearly contributions to reserves and investments (Figure 8) shows
that it is not all the sectors that have been accumulating reserves. Interestingly,
telecommunications, specialty chemicals and mining companies have been investing more
than they contribute to reserves. In contrast all other sectors on average contribute more
money to reserves than they invest.
-
50
100
150
200
250
300
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
R' B
illio
ns
Movement in reserves Investment
21
Figure 8: Average movement in reserves and investment per sector (2005-2016)
Source: InetBFA
Financial service, property, healthcare and consumer goods sectors are the main drivers of
reserves accumulation. In this regard banks on average contribute more to reserves (25
billion) than any other sector. It may be argued that this is explained by the need for banks to
meet the liquidity coverage ratios as required by the regulator. However the liquidity coverage
ratios can only explain the stock of reserves and not the growth thereof as is the case with the
banks. Furthermore there is evidence that banks have been exceeding their liquidity coverage
ratio as required by the regulator, between 2013 and 2015 Capitec Bank exceeded the liquidity
coverage ratio requirements by over 1000% (Makhaya & Nhundu, 2015:28).
5. Investment
In this section, we consider various measures for considering investment across the firms assessed. The asset base of companies is firm considered over time to assess major changes, before published data on capital expenditure and then mergers and acquisitions is considered, each of which shows the patterns of expenditure by firms.
5.1 Assets
The three largest sectors across the years in terms of assets held are banking, insurance and investment services (Figure 9). The large asset base of the retail banking sector is attributed to the wide spread of physical assets (branches, ATMs, etc.) that banks have, together with the non-physical (loans) assets. Standard Bank Group leads the banking sector in terms of assets (37% of total banking assets valued at over R5.2 billion in 2016), followed by Firstrand (22%) and Barclays Africa Group (21%).
Old Mutual leads the insurance sector (70% of total insurance assets valued at over R4.1 billion in 2016), followed by Sanlam Limited (16%) and MMI Holdings Limited (11%); and Investec Plc leads the investment services (71% of total assets valued at over R1bn in 2016),
- 5
-
5
10
15
20
25
30
35R
' Bill
ions
Investment Movement in reserves
22
followed by Remgro Ltd (9%) and Reinet Investments S.C.A (7%) although these firms are less comparable in terms of types of investments held.
The three largest sectors grew moderately between 2011 and 2016. In particular insurance grew with a CAGR of 7% from over from R2.9 billion in 2011 to over R4 billion 2016, followed by investment services (4.1% CAGR to over R1 billion in 2016) and banks (3.8% CAGR from R4.3 billion in 2011 to over R5.1 billion in 2016). On the other hand, the asset base in consumer services and healthcare grew rapidly with a CAGR of 24.9% and 24.5%, respectively.
Figure 9: JSE Top 50 total assets per sector 2011-2016 (2015 constant prices)
Source: InetBFA
Banks’ assets are largely made up of loans. An analysis of the lending behaviour of South
African banks shows that a significant portion of these loans are to households while only a
small portion fund investment activities in productive economic sectors (Figure 10). Although
loans and advances to industries have grown significantly, almost as much as household
loans, further analysis shows that the majority of these funds are utilised in the finance and
insurance sector largely for sales credit while another significant portion funds the community,
social and personal services (SARB, 2016). Important to note also is the fact that loans for
investment purposes have remained stagnant relative to household loans and advances to
different industries. In the section below we analyse total assets after excluding the financial
services sector.
-
2
4
6
8
10
12
14
2011 2012 2013 2014 2015 2016
Assets
(R
' Trilli
on)
Banks Insurance Investment Services
Property Specialty Chemicals Telecommunications
Consumer Goods Mining Paper
Health Care Consumer Services Industrials
23
Figure 10: Extension of credit by South African financial institutions (2004-2015)
Source: SARB quarterly bulletin
Note: Other loans to industry include instalment sale credit, leasing finance, mortgage finance and
other advances.
Financial services firms (banks, insurance and investments) lead the JSE Top 50 in terms of
assets, however if we control for these sectors, a clearer picture of changes in the asset base
of other firms in other sectors emerges (Figure 11). The property sector leads in terms of
assets, followed by mining, telecoms and speciality chemicals (which is only Sasol).
However, it is worth noting that the property sector is dominated by companies that do not
have operations at all in South Africa (i.e., Hammerson Plc, Intu Properties Plc, New Europe
Property Investments Plc and Capital & Counties Properties Plc). Moreover the two major
contributors to the asset base of this sector in 2016 are Intu Properties Plc and Hammerson
Plc.
The mining sector is led by Anglogold Ashanti Ltd and Anglo American Plat Ltd in terms of
assets held. In telecoms, MTN Group Ltd leads Vodacom, while Sasol is the only contributor
under speciality chemicals. Although it is convenient to refer to changes by sector, the latter
case of speciality chemicals points to an important constraint of this approach – that in some
cases a ‘sector’ as per JSE classification is in fact only constituted of one or two lead
companies and it thus makes more sense to assess the companies involved.
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
R' T
rilli
on
Investments Other loans to industry Loans to households
24
Figure 11: JSE Top 50 assets (excluding financial services) (constant 2015 prices) 2011-2016
Source: InetBFA
5.2 Capital expenditure on non-current assets
The speciality chemicals sector (i.e., Sasol Ltd) expended the most on non-current assets
(property, plant and machinery), followed by telecommunications and mining between 2011
and 2016 (Figure 12). It is interesting to note that Sasol alone expended more than all the
sectors in 2014, 2015 and 2016 although this comprised significant international investments.
However, the telecommunications sector (consisting of MTN and Vodacom) invested more
than the other sectors between 2011 and 2013 which may have to do with the importance in
that sector of investments in physical masts and network capacity, particularly given
constraints in terms of available radio spectrum.
Capital expenditure on physical capital grew to varying degrees across the entire period when
considered by sector. Sasol, telecommunications and mining grew at a CAGR of 22%, 13%
and 1.9%, respectively. However, the telecoms sector experienced noticeable increases in
expenditure in 2012 and 2013. MTN increased its capex expenditure by 55% in 2012 due to
capital investments across the group but mainly in Nigeria, as well as the weakening rand.
However, its capex decreased by 33% in 2014 due to capex decline in Nigeria and movements
in foreign currency. The property sector experienced a significant increase in capital
expenditure in 2016 due to the inclusion of Hammerson Plc.
0.0
0.5
1.0
1.5
2.0
2.5
2011 2012 2013 2014 2015 2016
Assets
(R
' Trilli
on)
Property Specialty Chemicals Telecommunications
Consumer Goods Mining Paper
Health Care Consumer Services Industrials
25
Figure 12: Top 50 capital expenditure by sector 2011 - 2016
Source: InetBFA
Expansion vs replacement capital expenditure
Capital expenditure can be classified into two types, expansion and replacement capital
expenditure. Replacement capital expenditure is meant to replace old or obsolete plants and
equipment while expansion capital expenditure is outlay to add to existing plants and
equipment to increase production capacity. Data on the type of capital expenditure is limited
and out of the companies under review only 18 companies provided a breakdown on the
nature of capital expenditure. Entities in the financial services industry (banks, insurance and
investment services) and the majority of companies in the top 20 did not report on this
breakdown. However, based on the companies that reported the breakdown, it appears the
majority of the capital expenditure is being utilised to maintain operations rather than
expansion although we are cautious in the interpretation of this data (Figure 13). The
difference in the proportions is relatively narrow, and as noted data limitations mean that we
do not look to disaggregate or interpret this data further.
-
50
100
150
200
250
2011 2012 2013 2014 2015 2016
Capital expenditure
(R
' Bill
ions)
Specialty Chemicals Telecommunications Property Mining
Banks Consumer Services Consumer Goods Insurance
Paper Health Care Industrials Investment Services
26
Figure 13: Expansion vs replacement capital expenditure (only 18 companies)
Source: InetBFA
5.3 Mergers and acquisitions
Overall, mergers and acquisitions were lowest in 2012 and 2013 due to only a limited number
of transactions in consumer goods, insurance, investment services, property and speciality
chemicals between 2011 and 2012 (Figure 14). By the very nature of merger activity, we would
expect some volatility between years in the value spent on transactions, also influenced by
sector or industry specific dynamics. However, mergers and acquisitions increased in 2014
and 2015 to levels slightly higher than in 2011. Major developments in 2011 included Steinhoff
acquiring JD Group and KAP, and Tiger Brands acquiring Davita Holdings, in consumer
goods; the merger between Momentum and Metropolitan to form MMI Holdings in insurance;
acquisition of OUTsurance and Rensburg Sheppards Plc by RMB Investment Holdings and
Investec Plc respectively, in the investment services sector; the acquisition of V&A Waterfront
by Growthpoint in the property sector; and Sasol’s acquisition of Canada’s Talisman Energy
Inc in speciality chemicals.
There is also a noticeable increase in mergers and acquisitions in the property sector beyond
2012 due to Intu Properties Plc’s acquisition of Midsummer Place and Parque Principado in
2013, and several entities in 2014. The health care sector also spent substantially in 2014 due
to Aspen Pharmacare Holdings acquiring 100% of the Sigma pharmaceutical business. In
2015, the significance increase was in the consumer services as result of Woolworths’
substantial acquisition of David Jones Limited. Companies in consumer goods spent high
values on mergers and acquisitions in 2016, driven by Steinhoff’s acquisition of a UK discount
retail chain (Poundland) and a US-based Mattress Firm, and Pioneer Foods’ acquisition of
Weet-Bix East Africa and UK-based Streamfoods. Remgro’s acquisition of Al Noor Hospitals
Group plc, and Rand Merchant Investment Holdings’ acquisition of UK-based short-term
insurer Hastings Group, largely drove the mergers and acquisitions in investment services;
while Sanlam’s acquisition of Morocco-based SAHAM Finances contributed significantly to the
increase in mergers and acquisitions spend in insurance.
Expansion44%
Replacement56%
27
Figure 14: JSE Top 50 mergers and acquisitions (constant 2015 prices) 2011-2016
Source: InetBFA
Mergers and acquisitions by geography
Controlling for dual-listed companies, most of the mergers and acquisitions in terms of value
by firms in the JSE Top 50 are taking place outside South Africa (Figure 15), albeit with
marginal differences in terms of the total value of transactions that were local and international
in most years. On average only 39% of mergers and acquisitions took place locally over the
period 2011 to 2016. Notably, mergers and acquisitions declined between 2011 and 2012
irrespective of geography, and then picked up steadily thereafter. However, local mergers and
acquisitions declined significantly in 2016.
-
10
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2011 2012 2013 2014 2015 2016
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Consumer Goods Investment Services PropertyInsurance Telecommunications Consumer ServicesHealth Care Banks IndustrialsSpecialty Chemicals Mining Paper
28
Figure 15: Top 50 M&A by geography (2011–2016)
Source: InetBFA
Firms in the JSE Top 50 invest more in mergers in South Africa than in the rest of Africa. In
general, more than 81% of investments made in Africa (including South Africa) from 2011 to
2016 were in South Africa (Table 7). Of the M&A activity outside of South Africa, the vast
majority involved transactions outside Africa.
Table 7: Top 50 M&A value by geography (2011 – 2016) 22
2011 2012 2013 2014 2015 2016
South Africa 43% 49% 40% 34% 52% 16%
M&A outside SA, of which:
57% 51% 60% 66% 48% 84%
SADC 7% 5% 4% 2% 3% 1%
Rest of Africa 1% 0% 5% 2% 4% 2%
Outside Africa 50% 45% 51% 62% 41% 81%
SA proportion in Africa 85% 91% 81% 91% 88% 81%
Source: InetBFA
Note: Figures may not add up 100% due to rounding.
Capital expenditure on non-current assets vs mergers and acquisitions
The JSE Top 50 invests more on non-current assets (property, plant and equipment) than on
mergers and acquisitions (Figure 16). Investment in non-current assets (physical assets) is
normally for expansion and/or upgrading purposes, while investment in mergers and
22 SADC excludes South Africa, and the rest of Africa excludes both SADC and South Africa.
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30
40
50
60
70
80
2011 2012 2013 2014 2015 2016
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South Africa Outside South Africa
29
acquisitions is normally for consolidation of business operations to secure or expand access
to existing or new markets.
Expenditure on physical assets grew at a CAGR of 8% from R145 billion in 2011 to R210
billion in 2016. Mergers and acquisitions decreased significantly (by 72%) from R91 billion in
2011 to R26 billion in 2012, then recovered rapidly with a CAGR of 35% to R85 billion in 2016.
Figure 16: Top 50 capex on non-current assets vs M&A (2011-2016)
Source: InetBFA
5.4 Investment activities of dual listed companies
Investment activities of dual listed companies in South Africa are very limited. This could be
as a result of the fact that these entities do not have significant operations in South Africa. Out
of the 69 mergers and acquisitions transactions that were carried out by these companies over
the period under review only five were in South Africa. This makes up less than 1 percent
(0.5%) of the value spent by dual listed companies on mergers and acquisitions over the
period under review. It also appears that a significant amount of the value of capital
expenditure by these companies is being spent beyond the borders of South Africa. Of the
dual listed companies under review, three gave brief insight into their major capital expenditure
projects in some of the years that were reviewed and all of these expansion projects were
outside of South Africa.
6. Discussion
The emphasis in this report has been to highlight important changes and trends in the
investment behaviour of some of the largest firms in the South African economy. This is
considered in relation to broader questions regarding the lack of structural change in the
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50
100
150
200
250
2011 2012 2013 2014 2015 2016
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Capital expenditure Mergers and acquisitions
30
economy, and continued tight control of key economic sectors by entrenched incumbent firms,
reinforced by high barriers to entry. The issues around investment are considered specifically
in terms of understanding investments of companies as they relate to industrial development
in South Africa. It is therefore relevant to consider differently firms that do not (or no longer)
have significant operations in South Africa. These companies, most of which are cross listed
internationally, tend to be the very largest South African companies at least when ranked in
terms of market capitalisation. However, it is clear that if policy is concerned with growing local
productive investment and activity and increasing black ownership of these firms, it is perhaps
less relevant what share black South Africans hold of companies that are largely no longer
‘South African’ but highly international. Growth in the market value of large internationalised
companies is important, but the assessment points out that if these firms are not investing in
South Africa or involved in sectors which are important for productive labour-absorptive
growth, then a pattern of stagnant growth in fixed capital formation and de-industrialisation of
the economy will continue. The underlying principle being that that the investments and
strategic decisions of large firms are critical in shaping the industrial development path of
countries, not least because of their capacity invest in new technologies, large scale high value
projects, new organisational systems, and human capital development.
The composition of South African lead firms hasn’t changed significantly especially within the
top half of the top 50 firms. The top 20 firms have remained essentially the same over the
period (although relative rankings may have changed) led largely by the mining and the
financial services firms. However, there have also been new entrants and exits into the top 50
as a whole that suggests some change in the relative growth of non-traditional sectors in the
economy. Several firms have exhibited very significant growth in rankings, such as in the case
of Steinhoff and Discovery, when compared to rankings in 2000. In addition, there has been
significant entry and growth of property management and health care companies. However,
hospitals and property companies do not (in terms of the nature of operations and value chain)
have strong direct linkages with high value adding downstream economic activity that
contributes to economic growth.
Of particular concern is the evidence that the majority of the large property groups that have
emerged do not in fact have any significant operations in South Africa, and are effectively
using the JSE platform as a source of capital for operations elsewhere. While this is a common
feature of international capital markets, it is problematic in South Africa in the context of low
domestic savings to fund investment, failures in financial markets and banking in particular in
financing emerging industries and businesses, and a perceived and factual lack of finance and
investment in general.
This raises an important point considered in the analysis about high retention of accumulated
profits by companies, which reserves could serve as a potential source of affordable capital
for companies. Generally firms and groupings of firms in terms of sectors exhibited fairly high
profitability and as a result it may be expected that firms face incentives to invest in expanding
capacity, other things being equal. In this regard, the assessment shows that firms have
retained substantial portions of profits, however a significant amount of these funds are being
reserved as opposed to invested. It is important to note here that there may be some legitimate
rationale for increased retention, even after dividends have been paid out, which may relate
to uncertainty in demand, low growth and the poor investment climate in South Africa in the
past few years. Notably, and this is often not considered in the current debates around an
‘investment strike’ in South Africa, firms are also less inclined to invest when they are in a
position of entrenched market power, where barriers to entry are high, and where their position
is not likely to be challenged by new emerging companies. High levels of concentration and
31
barriers to entry are a well-established feature of South African economic sectors.23 The
challenge for policy makers is to determine the appropriate set of incentives to stimulate further
investment in new capacity in particular, rather than simple replacement or ‘buying market’
share through M&A which has the effect of further concentrating industries.
On average replacement capital expenditure constitutes the majority of total capital
expenditure which means firms are focusing more on maintaining current operations as
opposed to expanding. We note however that the data available in this regard was limited and
as such could not be used reliably to draw further findings.
A focus on ‘investment’ in mergers and acquisitions is somewhat misleading, in that these
transactions do not represent an increase in real net wealth for the economy as a whole,
although in some cases they may raise significant efficiencies. The detailed data on M&A
reviewed shows that firms in the Top 50 have spent the largest proportion of the value of M&A
outside of South Africa. In terms of overall expenditure, investments in non-current assets are
significantly larger than the value of M&A expenditure.
There are important limitations in terms of the disaggregated company data to assess further
the types of investment made in particular, as noted throughout the report. However, it has
been possible to reliably discern the broad patterns that have emerged in terms of (low)
investment, change and continuity in the composition of the lead firms on the JSE, and high
company profit retention not matched by investments in additional capacity in South Africa.
The effects of largely internationalised companies has also been considered extensively, and
while certain generalised observations can be drawn using the reported company data, we
note the importance of considering dynamics at the sector and company level as well.
Further work in this area, and iterations of this working paper, bringing together the findings of
the corresponding studies, will also consider in more detail some of the key challenges arising
from a policy perspective in terms of enhancing structural transformation in South Africa
including through policy options to change the tightly concentrated nature of economic sectors
and patterns of ownership and control.
23 See CCRED Barriers to Entry research project
32
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33
Appendix
Table A: Movements of the JSE Top 50 (2000 – 2017)
Sector
Rank in
2000 Company
Rank in
2010 Company
Rank in
2015 Company
Rank in
2017 Company 8 Firstrand Ltd 9 Standard Bank Group Ltd 10 Firstrand Ltd 7 Firstrand Ltd
9 Standard Bank Invcorp 15 Firstrand Ltd 13 Standard Bank Group Ltd 10 Standard Bank Group Ltd
Banking 10 Nedcor Ltd 16 ABSA Group Ltd 16 Barclays Africa Grp Ltd 17 Barclays Africa Grp Ltd
20 Absa Group Limited 19 Nedbank Group Ltd 24 Nedbank Group Ltd 18 Nedbank Group Ltd
35 African Bank Inv Ltd 34 Capitec Bank Hldgs Ltd 26 Capitec Bank Hldgs Ltd
Mining
1 Anglo American Plc 1 BHP Billiton plc 5 BHP Billiton plc 4 Glencore Plc
3 De Beers Consol Mines 3 Anglo American plc 6 Glencore plc 6 Bhp Billiton Plc
4 Anglo Amer. Platinum 8 Anglo Platinum Ltd 23 Anglo American plc 8 Anglo American Plc
6 Billiton Plc 11 Impala Platinum Hlgs 31 South32 Limited 16 South32 Limited
14 Impala Platinum Hlgs Ld 12 Kumba Iron Ore Ltd 40 Anglo American Plat Ltd 28 Anglo American Plat Ltd
17 Anglogold Ltd 13 Anglogold Ashanti Ltd 44 Anglogold Ashanti Ltd 33 Kumba Iron Ore Ltd
19 Lonmin P L C 17 Gold Fields Ltd 39 Anglogold Ashanti Ltd
28 Gold Fields Ltd 24 Exxaro Resources Ltd
29 Gencor Ltd 26 African Rainbow Min
27 Lonmin plc
32 Harmony GM Co Ltd
42 Assore Ltd
44 Uranium One Inc
Consumer Goods
2 Richemont Securities Dr 2 British American Tob plc 1 British American Tob plc 1 SAB Millers
11 S A Breweries Plc 4 SABMiller plc 2 SABMiller plc 2 British American Tob Plc
30 Tiger Brands Ltd Ord 7 Compagnie Fin Richemont 4 Compagnie Fin Richemont 5 Compagnie Fin Richemont
41 Amalgamated Beverage 30 Steinhoff Int Hldgs Ltd 7 Steinhoff Int Hldgs N.V. 9 Steinhoff Int Hldgs N.V.
45 Steinhoff Interntl Hldgs 31 Tiger Brands Ltd 35 Tiger Brands Ltd 29 Tiger Brands Ltd
46 Pioneer Foods Group Ltd 50 Pioneer Foods Group Ltd
48 Distell Group Ltd
Consumer Services
38 Pick N Pay Stores Ltd 22 Shoprite Holdings Ltd 21 Woolworths Holdings Ltd 22 Shoprite Holdings Ltd
34 Truworths Int Ltd 28 Shoprite Holdings Ltd 24 Bid Corporation Ltd
36 Massmart Holdings Ltd 39 Mr Price Group Ltd 31 Woolworths Holdings Ltd
46 Pick n Pay Stores Ltd 45 Truworths Int Ltd 46 Mr Price Group Ltd
48 Woolworths Holdings Ltd 49 Truworths Int Ltd
Insurance
5 Old Mutual Plc 18 Old Mutual Plc 12 Old Mutual plc 14 Old Mutual Plc
15 Sanlam Ltd 20 Sanlam Limited 15 Sanlam Limited 15 Sanlam Limited
21 Liberty Group Ltd 43 MMI Holdings Limited 27 Discovery Ltd 27 Discovery Ltd
22 Liberty International Plc 45 Discovery Holdings Ltd 47 MMI Holdings Limited
36 Liberty Holdings Ltd
39 Metropolitan Life Ltd
43 Alexander Forbes Ltd
44 Fedsure Holdings Ltd
50 Discovery Holdings Ltd
Investment Services
16 Remgro Ltd 21 Remgro Ltd 17 Remgro Ltd 20 Remgro Ltd
18 Investec Group Ltd 25 RMB Holdings Ltd 25 Brait SE 23 RMB Holdings Ltd
23 Johnnic Holdings Ltd 37 Investec plc 29 RMB Holdings Ltd 34 RMBI Hldgs
31 RMB Holdings Ltd 49 Reinet Investments 30 Investec plc 35 Investec Plc
32 BOE Ltd Ord 33 Reinet Investments S.C.A 38 PSG Group Ltd
34 Venfin Ltd 36 Rand Merchant Ins Hldgs 40 Reinet Investments
35 Investec Holdings Ltd 38 PSG Group Ltd
37 Tigon Ltd
40 Coronation Hldgs Ltd
48 New Africa Investment
Property
38 Capital Shop Cent Grp 22 Intu Properties plc 30 Growthpoint Prop Ltd
40 Growthpoint Prop Ltd 26 Capital & Counties Prop 32 Hammerson Plc
32 Growthpoint Prop Ltd 36 Intu Properties Plc
37 New Europe Prop Inv plc 37 Redefine Properties
42 Redefine Properties Ltd 42 New Europe Prop Inv
43 Resilient REIT Limited 43 Resilient Reit Limited
48 Capital & Counties Prop
29 Aspen Pharmacare 14 Aspen Pharmacare Hldgs 19 Aspen Pharmacare
34
Health Care
50 Netcare Limited 18 Mediclinic Internat Ltd 25 Mediclinic Int Plc
41 Netcare Limited 45 Netcare Limited
47 Life Healthcare Group
Paper
26 Sappi Ltd 19 Mondi plc 21 Mondi Plc
49 Mondi Ltd 44 Sappi Ltd
50 Sappi Ltd
Internet & Media
7 Dimension Data Hldgs 10 Naspers Ltd 3 Naspers Ltd 3 Naspers Ltd
24 Johnnic Communications
46 Mih Holdings Ltd
47 Datatec Ltd
49 Naspers Ltd -n-
Telecoms 12 M-cell Ltd 5 MTN Group Ltd 9 MTN Group Ltd 12 MTN Group Ltd
14 Vodacom Group Ltd 11 Vodacom Group Ltd 13 Vodacom Group Ltd
Industrials 25 Bidvest Ltd Ord 23 Bidvest Ltd 20 Bidvest Ltd 41 Bidvest Ltd
33 Barloworld Ltd
Specialty Chemicals 13 Sasol Ltd 6 Sasol Ltd Sasol Ltd
Basic Metals 33 Mittal Steel Sa Ltd
Packaging 42 Nampak Ltd Ord
Logistics 27 Imperial Holdings Ltd 39 Imperial Holdings Ltd
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